Saturday, February 25, 2012

Why $100+ Per Barrel Oil is a Godsend

"Ironically, the best therapy [for higher oil prices] is a higher oil price. It makes it profitable to bring into production more costly resources around the world. The rise in recent years to $100-plus a barrel is a godsend. Peak oil theorists are being refuted; so are greenies who imagined a towering oil price would usher in a carbon-free future. The opposite is seen to be true. Oil sands, shale hydrocarbons and even biofuels have been made profitable with existing technology, and of course technology can be counted on to advance.

A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil.

Gasoline is the most visible price in the economy, and its gyrations cause the juju men in Washington and elsewhere to do crazy things, if not so crazy when understood that their real goal is to receive praise and ward off blame for the behavior of energy prices. But the price mechanism itself is still America's real energy policy, thank God.

One last thing: In the past 100 years, the real price of gasoline, in current 2011 dollars, has spent almost all its time between $2 and $4 (see chart above, data here). So today's price is hardly the end of the world."

22 Comments:

I think we will see huge amount of capital and smart people move into the energy sector, and we will see gluts of energy in the future. The longer we see $100 a barrel, the longer the future gluts will last.

If we can get the GOP to forsake ethanol, and get the Dems out of wind and solar, the future looks bright.

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, said on Friday that his research firm is sticking with the forecast it made in September:

A new recession is inevitable, despite improvement in high-profile economic indicators, such as job creation and unemployment, and a stock market rally.

ECRI is one of the more widely respected firms on economic recessions, as it has never been wrong when forecasting that a recession would start, or failed to predict a recession well before it was widely accepted.

Achuthan predicts the recession will happen even without a new shock to the economy, such as a spike in oil and gas prices or a Greek sovereign debt default sparking a financial meltdown.

If those things occur, he says they will simply make an inevitable recession more painful.

In fact, Achuthan said data gathered since his September forecast only confirms his view that economic growth has slowed to such a degree that a downturn is now unavoidable, likely by late summer.

Even ECRI's own leading indicators have been showing steady improvement since October.

The warning signal flashing is what economists call the “oil expense indicator”: the share of oil expenses as a proportion of worldwide gross domestic product (GDP) — oil prices times oil consumption divided by world GDP.

Since 1965, this has averaged roughly 3 percent of GDP, and it has only exceeded 4.5 percent during three periods: in 1974, between 1979 and 1985 and in 2008.

Each period has seen severe global recessions.

If it (oil) is too high for too long, the results are dramatic.

Using the oil expense indicator, economists say Brent crude, the international oil benchmark, would need to be in the low $90s per barrel to be under the 4.5 percent danger mark.

In fact, Brent hit a two-and-a-half-year high of more than $127 per barrel in April and...has been over $100 for six months.

A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil.

What new supply? After hundreds of billions in spending the world is still producing less light sweet crude than it did in 2005. Oil is not priced higher because American driving has collapsed and demand has fallen.

But the price mechanism itself is still America's real energy policy, thank God.

Nonsense. If that were the case the gas rig count would collapse because nobody wants to sell a product for $3 if it costs $7 to produce. But if you listen to the interviews and conference calls you find that the CEOs of the shale companies have no choice. If they stop drilling the left side of the Balance Sheet will have to be written down. Since the right side will not go down most companies would quickly find themselves in Chapter 11 bankruptcy. That would not happen if the price mechanism were driving the energy policy.

===================================Not always. A recent claim that neutrinos coulc sometimes exceed the spped of light has been withdrawn.

F still equals MA, so while we may get incrementally better at applying F, each increment is going to cost more than the last.

Same goes for finding the fuels that we need to make the F.

As for current high gas pries, the best idea I have heard is to eliminate the various blends that are required for different seasons and areas and settle on just one blend for a few years - until the energy glut happens.

If you make it increasingly costly and risky to open a small enterprise, then no wonder unemployment remains high

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Nonsense.

Subtract out the job lossses from small businesses that fail, and their job creation looks far less stellar.

For those businesses that do survive, it is often ten years or more before they have as many as ten employees. Looking to small business for big job grwth in the short run is a fool s idea.

The vast majority of working Americans work for a few thousand large companies, and the most successfule new large companies are successful largely because the do not, or do not need to, hire a lot of Americans.

Couldn't you logically argue that a pneumonia outbreak is great because it would encourage large amounts of doctors and researches to treat and explore cures for the disease? Whereas if only one person each year got pneumonia in the entire world, there would be little incentive to perform the R&D necessarily to develop a cure/vaccine for just that one case?

certainly, a pneumonia outbreak drives research etc, but it also kills people and causes widespread suffering and loss of productivity.

to decide if it is a good thing or not, you need to look at the costs as well as the possible benefits as well as all the things that the money that goes to such research would have otherwise been used for.

i think that high oil prices, like a pneumonia outbreak, wind up having greater costs than benefits.

I understand where you are coming from, and agree with your point to an extent. I think your logic is certainly valid. However, despite all the costs diseases such as cancer have caused the human species, dont you think the net benefit of a cancer solution going forward would be worth it? Imagine all the future people we would save by developing a cure. Naturally it takes decades of cancer damaging our species in order to justify and fuel the mass R&D required to find a cure, but alas ultimately one will be found.

It is a tough call to make that is probably subjective depending on individual values. Not sure we will be able to come to a concise conclusion.

Ryan: "It is a tough call to make that is probably subjective depending on individual values. Not sure we will be able to come to a concise conclusion."

It depends on whether your view is strictly positivist - that is the end justifies the means, and any cost/benefit analysis that results in a net positive is a good thing - or you believe there are objective moral values, like killing a human being is a bad thing, and you wouldn't be ecstatic that people were dropping like flies from pneumonia, even though you suspected a cure would be found as a result.

A test of your view might be for you to visit terminal cancer patients, and remind them that their pending demise is a good thing, as they are helping bring a cure closer to reality. If you enjoy this activity, then you are justified in you view that it's the result that count.

We may also be grateful for the 30-40 thousand people who die each year on US highways, as their contributions have advanced auto safety by orders of magnitude. Something that wouldn't have happened otherwise.